Since the recent Nike quarterly earnings report, the stock price dropped 20% in one day (June 28, 2024) and continues to hover around $72 - $75 per share. This has raised concern for employees as they rely on Nike stock to fund a significant portion of their investment strategy and lifestyle needs.

Below are 4 thoughts on the recent price drop and action items you can implement to move forward during this downtime.

Give yourself time to recover

 It’s easy to lose sight of this when the stock price is rising. The focus goes towards remaining invested for as long as possible so you don’t miss additional investment gains and forget that volatility can disrupt your strategy.

In our blog post from August 1, 2022, we analyzed the recovery period for Nike stock price when there is a 20% downturn. We can’t predict how long this recovery period will take, but history tells us that on average, it takes 339 days.

Action Items:

• Stock options: The most common approach is to exercise and sell your Stock Options by converting it to cash before the expiration deadline. You may want to consider the less common option to exercise and hold the stock. This gives you an indefinite timeline to hold the stock and strategically wait until the right time to sell. For the exercise and hold strategy, you need to have cash to purchase the stock. For example, to exercise and hold 100 shares at $75 per share, you need $7,500 cash to purchase, so plan accordingly.

• Strategically diversify: Diversify new ESPP and RSU purchases. Selling new shares at the time of purchase does a couple of things: (1) Avoids the risk of loss in value, (2) allows you to diversify into a balanced investment portfolio, and (3) gives time for your older Nike stock purchases to recover.   

Strategically raise funds when needed to minimize taxes

Rather than focusing on “how much cash do I need”, look at each of your Nike investment buckets and determine how you can get the cash you need in a tax-advantaged way.

Action Item:

• Tax analysis: For RSUs and ESPP, look at each Lot to determine which holdings would sell at a capital gain and which would sell at a loss. Review critical factors such as (1) how much cash do I need, (2) how much investment will remain, (3) what is the net tax impact of what I’m selling, and (4) how long until I need to raise more funds.  

Re-evaluate your financial plan

When the stock price is down, it’s an opportunity to evaluate whether changes to your financial plan are required to stay on track with achieving your long-term goals.

Action Items:

• Maximize benefits: Specifically ESPP stock while the price is low. At the next ESPP enrollment, consider increasing your deferral percentage to the maximum of 10%. 

• Adjust investment strategy: Evaluate your overall concentration of Nike stock. If Nike stock is a large portion of your overall investment portfolio, consider ways you can maximize your savings going forward into a diversified portfolio to reduce your overall exposure.

• Stock choice: Think about your upcoming Nike stock choice. If you’ve taken 100% RSUs in the past, does it make sense to change your strategy to 50/50 stock options or 100% stock options?

• Prioritize your expenses: Determine which expenses are most important to you. Consider reducing or delaying expenditures that do not align with your highest priorities. This approach can feel difficult at first, but the more you buckle down during this season, the greater impact it will have on your financial plan.

Re-visit your college savings plan

Many Nike employees rely on their stock options to fund their kid’s college expenses. If this was your strategy, your options are underwater unless you have grants from 2014 (which expire soon) – 2017.

Action Items:

• Evaluate other funding sources: Do you have other investment levers that can be used to fund college expenses?

• Cash flow: How much cash flow do you have within your annual budget to fund college expenses? Will this be sufficient to cover part or all of the expected cost?  

• Deferrals: If you reduce your retirement deferrals, will this increase your cash flow enough to fund annual college expenses?

• Prepayments: If you are pre-paying any loans (ie: paying extra on your monthly mortgage), consider paying the minimum to free up cash flow for college expenses.   

• Grants and scholarships: Are there opportunities to explore this further?

• Adjusting expectations: Does this prompt a discussion with your kids around sharing the cost of college expenses?  

Consider your timeline. When Nike stock is increasing, it’s easy to lose sight of your timeline because the focus is not missing out on the appreciation. The recent volatility is a reminder that time is the most valuable asset when investing. The action items above are the starting point to navigate through the volatility. Please reach out to us so we can continue the discussion and help implement these strategies to remain on track with your long-term financial goals.

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As the golden years approach, retirement promises relaxation and newfound freedom. However, during this period of life, there's an often misjudged financial responsibility - Required Minimum Distributions (RMD). Despite an investor saving diligently to tax-deferred accounts like pre-tax 401(k)s or traditional IRAs for retirement tax advantages, higher tax rates often blindside retirees due to these distributions.

Failure to prepare for RMDs can lead to a substantial increase in your retirement tax bill.

Fortunately, strategic retirement planning and foresight offer avenues to mitigate the impact of an inflated tax bill. By reducing your taxes, you gain the flexibility to allocate your funds where they matter most – be it for personal expenses, supporting loved ones, or giving back to charitable causes.

Understanding RMDs

RMDs are mandatory withdrawals from tax-deferred retirement accounts starting at age 73 (or 75 for those born in 1960 or later). These withdrawals aim to ensure you pay taxes on the money you've saved.

Each year, individuals can calculate their RMD by dividing the total amount in their eligible retirement accounts at year-end by a factor determined by the IRS, derived from their life expectancy which is listed in the Uniform Lifetime Table.

Let’s use an individual who is age 73 and had a $1,000,000 IRA balance as of December 31 of the previous year as an example. Their IRS life expectancy factor is 26.5, which means that their RMD for this year will be $37,735.85.

$1,000,000 ÷ 26.5 = $37,735.85

It's crucial to take RMDs on time to avoid penalties. Failure to do so can result in a 25% excise tax on the amount not withdrawn as required.

Don’t Leave your RMDs Unchecked

As each year passes, the life expectancy factor used to calculate Required Minimum Distributions (RMDs) decreases. This results in a larger portion of the investment portfolio needed for mandated withdrawals. Put simply, the older you are, the higher the required withdrawal amount, which in turn increases the associated tax bill.

To illustrate this increase in RMDs over time, let’s consider that someone with a $1,000,000 IRA balance must take approximately $37,736 at age 73, or about 4% of their pretax eligible portfolio. Seventeen years later, at age 90, the required withdrawal amount grows to over $118,000, or about 8% of their qualified portfolio.

This is where the danger of RMDs becomes evident. Left unchecked, RMDs can snowball, leading to an increasingly burdensome annual and lifetime tax bill. Additionally, as your income rises due to RMDs, you may inadvertently trigger additional tax traps such as:

• Taxes on Social Security Benefits: An increase in income can subject a higher percentage of your Social Security benefit to taxes. Whether or not your Social Security benefits are taxed is based on your combined income level and marital status.

• Medicare IRMAA surcharges: These surcharges present another potential financial concern. This can increase monthly Medicare premiums due to the Income Related Monthly Adjustment Amount (IRMAA). If you're enrolled in Medicare or plan to enroll within the next two years, exceeding the income threshold by as little as $1 could result in hundreds of dollars in additional premiums for Medicare Part B and Part D.

Strategies to Mitigate Tax Impacts of RMDs

Although failure to plan for RMDs can cause tax traps, thoughtful strategizing can help. Here are a few ways to mitigate tax impacts of RMDs, so they support your retirement lifestyle rather than cause a headache:

Withdraw more funds than you need

The most straight-forward strategy is to withdraw more funds than you need after age 59½. This age typically marks the earliest point at which you can start withdrawing from a tax-deferred account without facing a 10% early withdrawal penalty. By deliberately withdrawing funds, you can reduce your account balance and, as a result, your future RMDs. This strategy can be advantageous when current tax rates are lower than anticipated future rates.

Utilize Roth Conversions

A Roth conversion involves transferring a portion of funds from a traditional IRA or other tax-deferred retirement account into a Roth IRA. During this process, taxes are paid on the transferred amount at ordinary income tax rates for the year of conversion. The remaining funds are then reinvested in the Roth account.

This strategy appeals to many, especially those aiming to strategically reduce future Required Minimum Distributions (RMDs). Withdrawals from Roth IRAs in retirement are tax-free, and there are no RMD requirements, making this option attractive for minimizing tax obligations.

The rationale behind opting for a partial Roth conversion revolves around managing when and at what rate taxes are paid. By strategically choosing to pay taxes on tax-deferred dollars in a year when you are in a lower tax bracket than when you anticipate withdrawing the funds, you can maximize tax benefits. Additionally, reinvesting dollars into a Roth IRA allows them to continue benefiting from compound growth, with all future growth being tax-free.

Effective Roth conversions should be based on a thorough analysis of both current and future tax brackets, considering potential changes in tax rates and various sources of retirement income. It's crucial to convert just enough to utilize the lower tax brackets, maximizing the advantages of Roth Conversion.

Consider this scenario: you possess a $1,000,000 IRA and have recently consulted with your financial planner for a retirement tax analysis. The analysis suggests that executing a $50,000 Roth Conversion to fill up the 12% tax bracket would be prudent. This strategic move takes advantage of the current lower tax rate, shielding you from potential future tax increases when Required Minimum Distributions (RMDs) come into play. Given the expectation that RMDs will push you into the 25% federal tax bracket in the future, this decision protects you from paying an additional 13% in taxes.

During this conversion process, the $50,000 seamlessly transitions from your traditional IRA to a Roth IRA. Although this amount is subject to ordinary income tax, you have flexibility in managing the tax liability, whether through tax withholding on the Roth Conversion or by utilizing estimated taxes from alternative sources.

It's important to note that any subsequent growth on the converted amount within the Roth IRA remains entirely tax-free for you or your beneficiaries, providing lasting financial benefits.

Make an Impact through Charitable Donations

Another strategy to decrease your tax burden involves donating some of your IRA distributions directly to a qualified charity. Once you reach age 70½, you become eligible to make a Qualified Charitable Distribution (QCD), which is a tax-free transfer of funds from your IRA to an IRS-recognized charity. While these distributions are not subject to taxation, they do count towards fulfilling your required minimum distributions for the year.

Retirees who do not immediately require their RMDs and wish to support their chosen charity or religious institution tax-efficiently should evaluate whether making donations directly from their IRA aligns with their financial goals.

Viewing QCDs as part of a broader tax and charitable strategy is essential. Donating directly from an IRA offers a more significant financial benefit than donating cash or appreciated securities because it reduces your Adjusted Gross Income (AGI). This is particularly advantageous for retirees who no longer itemize deductions and instead choose the standard deduction, maximizing the tax benefits of charitable giving.

Have an RMD Strategy in Place

Grasping the nuances of RMDs is pivotal for retirement preparedness. Neglecting to address RMDs can result in significant tax liabilities, jeopardizing your financial stability during retirement.

By integrating proactive strategies into your retirement planning, you can mitigate the effects of RMDs, maintain control over your tax situation, and align your retirement savings with your lifestyle and legacy goals. Seeking advice from financial experts can offer personalized support in navigating RMDs effectively, empowering you to pursue your retirement aspirations confidently.

For more on retirement strategies, download our 36-page guide here.

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Between Fed Policy and the Presidential election, 2024 has all the makings to derail investors. While these factors introduce volatility and uncertainty, historical insights and a sound financial plan can guide those navigating the financial markets.

The year began promisingly, with the market reaching all-time highs in the first quarter of 2024. However, the start of the second quarter has highlighted the inherent unpredictability of the financial landscape. Beneath these surface-level fluctuations lies a geopolitical landscape marked by pivotal events that demand attention.

Fed policies will continue to impact market dynamics

The Federal Reserve's stance on interest rates emerges as a significant factor shaping market sentiment and performance in 2024. Speculation about potential adjustments in interest rates can significantly influence investor behavior and market dynamics. Lower interest rates can stimulate economic activity and boost equity valuations. However, uncertainties surrounding the timing and magnitude of such policy shifts add complexity to the investment landscape. At the beginning of the year, the Fed indicated it might cut rates at some point in 2024. But with inflation remaining higher than expected, it's now anticipated that there will be fewer rate cuts (if any) than initially predicted.

The "cost of admission": lessons from decades of market turbulence

Regardless of the headlines, it's fundamental to understand that the path to stock market growth is paved with bumps in the road. The following chart from JP Morgan nicely illustrates how volatile the stock market can be over short periods of time. In the chart, grey bars represent the returns for each calendar year, while red dots show the intra-year declines.

Looking back to 1980, the S&P 500 experienced an average sell-off of 14.2%, while ending positive in 33 of the 44 years measured. This inherent market fluctuation underscores the “cost of admission” for those seeking long-term gains through stock investments.

Insights from past elections: market performance amid political uncertainty

In most years, the stock market experiences growth, and this pattern holds true for presidential election years as well. However, investors should be prepared for increased volatility due to market uncertainty. Over the past four decades, election years have witnessed heightened market volatility fueled by the ambiguity surrounding political transitions. Despite this turbulence, historical data illustrates the market's resilience.

The S&P 500 has delivered a median total return of 11% over the past ten election cycles, inclusive of the 2008 Global Financial crisis. Though slightly lower than the median return of 15% across all years since 1984, this resilience showcases the market's ability to weather political flux.

Despite the uncertainty surrounding elections, historical data indicates that remaining invested through the election has proven advantageous. Once election results are announced, returns often speed up, usually boosting equity valuations and prices post-Election Day regardless of election outcome.

Leveraging a well-crafted plan for stability

During market turbulence driven by factors such as Federal Reserve policies and elections, a well-crafted financial plan acts as a stabilizing force. As we journey through 2024, it's essential to acknowledge that fluctuations are inherent in investing. Stress-testing your financial plan against various scenarios becomes vital, providing resilience in the face of uncertainty. While headlines may evoke strong emotions, maintaining a long-term perspective grounded in a robust plan aids in navigating choppy waters.

As 2024 unfolds, investors are reminded to stay committed to their financial plan's principles. By drawing on historical insights and adhering to a clearly defined strategy, investors can confidently maneuver through market volatility, knowing that their financial plan serves as their guiding star, directing them toward their long-term objectives.

Sources

1. Human Investing. (2024). 2024 Q1 Economic Update: Politics and the Market. Human Investing Blog. Retrieved from https://www.humaninvesting.com/450-journal/q1-2024-economic-update

2. Goldman Sachs. (2024, February 1). Global Macro Research. Retrieved from [https://www.goldmansachs.com/intelligence/pages/2024-the-year-of-elections-f/report.pdf]

3. J.P. Morgan. (2024). Guide to the markets: March 31, 2024.

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If you’re a business owner, own a rental property, or receive self-employment income and are registered with a Secretary of State, you may be subject to Beneficial Ownership Information (BOI) reporting. To provide ownership security to U.S. licensed companies, the U.S. Treasury Financial Crimes Enforcement Network (FinCEN), is requiring initial BOI reports as of January 1, 2024 from domestic and foreign companies who file with a Secretary of State or similar offices in the United States.

Know when to file a report now to avoid headaches later

Whether you are involved in a partnership, LLC, or corporation, the importance of reporting to FinCEN is not just for security purposes. If not filed on time, BOI reporting can become a personal financial burden. There is no fee associated with BOI reporting, however those who fail to report or willfully violate the BOI requirements may be subject to civil penalties of up to $500 for each day the violation continues. Below are deadlines that will help individuals determine when they will need to file a BOI report:

• Entities created or registered on or after 1/1/2024: 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report.

• Entities created or registered before 1/1/2024: Must report an initial BOI before 1/1/2025.

• Entities created or registered after 1/1/2025: 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.

This is a one-time filing, but keep tabs on your future business changes

If changes occur with required information about your company or its beneficial owners, your company must file an updated report no later than 30 days after the date of the change.

Please note, company applicants cannot be removed from a BOI report even if that individual no longer has a relationship with the company.

Any individual associated with the reporting company is eligible to file the report on behalf of that group, but to mitigate any mistakes, seeking out a trusted legal professional such as an attorney, is recommended. Please visit the FinCEN BOI E-filing website and their thorough Q&A section for further information on BOI reporting.

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It’s no secret that Nike has been going through a tough time with the recent rounds of layoffs. This can create concern and uneasiness around a Nike employee’s livelihood and how it may affect their financial picture. As we have been actively guiding our Nike clients through this season, we wanted to share things to consider if you were or will be impacted by these layoffs.

Understand Your Severance Package

Nike has a standard severance agreement and package that includes a one-time payout of cash based on your level and tenure at Nike. This can range from 4 weeks to 48 weeks of salary.

In addition, there is often a continuation of health insurance through COBRA that includes a subsidy of the cost for around 6 months. This provides some time to transition to a different health insurance plan if that is right for you.

If you have any accrued PTO that you haven’t used, this will be paid out to you in cash after officially leaving Nike. This is often extra cash that people are not expecting and can help create some comfort during an uncomfortable time.

Lastly, you may still be eligible for the PSP bonus paid out in August as long as you are still employed anytime in May (the last month of the Fiscal Year).

Create a Strategy for Deferred Comp Distributions

If you contributed to the Nike Deferred Compensation Plan, leaving Nike will typically trigger distributions according to the schedule you designated when enrolling. This can range from a one-time lump sum or installments over 5, 10, or 15 years. For some, this can be a way to supplement income. However, for others who don’t need the funds, these distributions can create a tax issue to strategize around. These payments are sent out quarterly, so if this is needed for cash flow you should plan accordingly.

Plan for your Stock Options and RSUs

Any vested but unexercised stock options typically need to be exercised within 90 days of leaving Nike, unless you qualify for the special retirement benefits at age 55 or age 60 (you keep unvested options and can sell for lesser of expiration or 4 years). At this time, you typically will lose any unvested options or RSUs.

During larger layoffs, there can be enhanced vesting of options and RSUs, where upcoming vests within a year will accelerate and vest. In addition, Nike can also provide you with more time to exercise your stock options like up to 1 year instead of 90 days. When Nike stock price is struggling like it is now, it makes your exercise decisions in a small window difficult. We would recommend working with your financial advisor to determine a defined strategy to maximize the benefit and minimize taxes.

Keep track of your PSUs and ESPP

Normally, you need to be employed at Nike at the vest date to receive your PSUs. In a situation of Reduction in workforce (larger layoffs), you can still receive any PSUs if the vesting date is within one year of termination.

Any ESPP that has been contributed but not purchased yet will be refunded to you. In addition, you have more control over your ESPP shares that you have purchased previously as these can be held as long as you want. This provides an opportunity to be patient and strategic on any sale of this stock.

Prepare to mitigate tax liability

All the benefits outlined above come with tax implications that are not always easy to see. These items can quickly add up to large amounts of taxable income, which can push your income into high tax brackets. In addition, the tax is often under-withheld (22% Federal and 8% State), which can lead to a significant tax bill in April if not accounted for properly.

Know your 401K options

This recommendation depends on each person’s situation. Nike has a strong investment fund lineup, and you should compare that to any other place that would replace it. However, leaving your 401(k) at Nike requires more activity and maintenance since it does not have an auto-rebalancing feature, which would periodically sell funds that drift from their target allocation. For example, if the large company stock fund was targeted at 60% and grew to 64%, you should periodically bring that back to the 60% target to maintain the proper risk/return mix. Another factor to consider is the desire to make Backdoor Roth IRA contributions if you have extra funds for retirement savings.

Support when transitioning into the next job

The cash you receive from benefits like severance, PTO payout, and stock sales can help provide some comfort to your situation. While you are in transition with your job, we recommend creating a system to feel like you are receiving a paycheck replacement with your cash to reduce anxiety and bring normalcy to your day-to-day financial life. An example of this system would be taking your net benefits payout and depositing it in a savings account, then setting up bi-weekly transfers to your checking account to simulate your paychecks.

All these considerations are tied to a person’s long-term financial plan. Through financial planning projections and scenario planning, you can help determine what the next job needs to look like to achieve your goals for retirement, kids’ education, and lifestyle. It can provide you with the information to know if you need a comparable compensation package to Nike or if you could take a job with lesser pay that could be more fun or less stressful.

Being laid off from any job often creates much uncertainty, stress, and concern. With the right preparation, planning, and advice, it can be a smoother transition, and you may end up in an even better place than where you started.

If you have questions about preparing for or navigating a current layoff at Nike, please feel free to contact us at nike@humaninvesting.com.  

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Bonds are a fundamental piece of most investment portfolios, and the basics of bonds can confound even seasoned investors. When testing financial literacy through 5 core questions, bonds are frequently the topic that most commonly trips people up (try the quiz here). We want to make it easier for you to grasp the basics of bonds, whether you're new to investing or just want a quick review.

lend money to companies or the government

At its core, a bond is a type of loan. It's usually issued by governments or companies that need to borrow money. When you buy a bond, you're essentially lending money to the issuer. As the bondholder, you receive interest payments from the borrower.

Bonds are generally considered less risky than stocks, because if the borrower faces bankruptcy bondholders get paid before stockholders. However, the return on bonds is typically lower than stocks, and there's a risk that the borrower might not be able to pay back the debt.

key terms related to getting paid back

The principal value is the amount being borrowed by the issuer. Typically bonds trade in $1,000 increments.

The maturity date is the date the bond will return the principal value (aka face value) to bondholders.

You also receive interest when you lend money. The interest received is usually based on the Coupon rate, which is the interest payments paid to bondholders. Typically as a percentage of face value paid annually. For example, if you have $1,000 of a bond with a coupon rate of 5%, you will receive $50 in interest payments every year until the bond matures. Upon maturity, you will get the $1,000 principal back.

Credit rating is like a credit score for a government or company, indicating how likely they are to make payments. A higher credit rating indicates a higher chance of the issuer making payments.

Imagine if Disney needed to raise money via bonds

When a bond is first issued, the issuer sets the terms like the coupon rate and maturity date. The reality is that interest rates and credit risk (how likely the issuer is to payoff the bond) change after the bond is issued, which causes the bond price to fluctuate.

Imagine if Disney issues bonds paying 5% interest, the current market rate.

You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures.

If interest rates go up, this isn’t good for your bondS

If interest rates rise next year to say 8%, and Disney issues new bonds, they will probably issue them at the new interest rate.

Your neighbor Laura decides to buy $1,000 of the new bonds, and she gets an $80 coupon from Mickey Mouse every year.

Because interest rates rose, the value of your bond paying $50/year goes down in value, less than the $1,000 you purchased it for because the $1,000 could buy Laura’s bond paying $80/month.

The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000. This is why when interest rates rise, bond prices fall.

Think of a teeter-totter: When one side’s down (interest rates), the other side must go up (bond prices).

When your bond is trading below $1,000, it is trading at a discount, typically with a coupon rate lower than current interest rates. If your bond is trading above $1,000 it is trading at a premium, typically with a coupon rate higher than current interest rates.

Timing bond returns

Remember that the bond market is full of smart people looking to try and make money. As a result, all similar bonds are priced so they provide similar returns. For example, if you see a 2 year bond with a 5% coupon, and a 2 year bond with a 3% coupon, the price of the 3% coupon bond will be so much lower than the 5% coupon bond and you will end up making just as much money either way. This is called the yield, or coupon + price return on a bond. Keep in mind if there are differences in bonds (i.e. higher or lower credit risk, time to maturity, other terms of the loan), that can cause differences in yield too.

When should I own bonds?

Long term equities tend to produce higher returns than bonds. However, these equity returns involve higher risk, and some people can’t afford to wait to make their money back. Bonds are an important ballast to ensure you can sleep at night, keeping a portion of your portfolio safe. Bonds can also provide a reliable source of cash flow that can be more reliable than stock dividends.

Finding the right bond for you

Like stocks, there are different bonds. Sovereign bonds (issued by governments) tend to be less risky, providing lower returns because of the lower credit risk. On the other hand, corporate bonds (issued by companies) provide higher returns, with an increased danger of losses due to companies going bankrupt.

At Human Investing, we provide individual treasury ladders for clients. US Treasuries are broadly considered one of the safest investments in the world. By owning individual bonds, you know you will get your principal returned upon maturity. The liquidity of treasuries also allows for flexibility if funds are needed sooner than anticipated.

Alternatively bond funds can be an excellent solution for clients, particularly those seeking growth. By investing in a bond fund, you gain exposure to a diversified range of bonds, enabling you to take on credit risk more effectively than as an individual investor. Much like owning a stock index fund, owning so many different companies debt means even if a few go bankrupt, they are such a small piece of your portfolio you will be okay.

Still have questions, or want to talk to an advisor? Reach out to us at hi@humaninvesting.com, or 503-905-3100.

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Welcome to 2024

It’s an election year and America will vote in November for a new Congress and President. Regardless of the election outcome, some investors will be pleased, while others will be disappointed. This article will help investors understand how the markets have been influenced when different political parties take control of both Congress and the Presidency. Looking at data from 1926 through 2023, the main conclusion is straightforward:

Over time the markets tend to rise, regardless of which party controls the White House or Congress.[1]

What impact does the President have on the stock market?

Democratic presidents have overseen slightly higher stock returns compared to Republicans. However, this difference is minor and not considered statistically significant. The variance in stock returns under different political parties can be attributed to the random chance of who happened to be in power at a given time. The reality is the US economy is vast and intricate, making it challenging for any individual, even a powerful figure like the President, to completely control its direction.

A recent example is the presidential election of 2016. The general expectation was for Hillary Clinton to win. When Donald Trump unexpectedly secured victory, initial market reactions led to a decline. By the following day’s market close, markets had not only recovered from the dip but ended up positive on the day. It’s hard to know how the market will respond to unexpected information, and it’s equally difficult to predict what impact a President may have on the stock market.

What impact does Congress have on the stock market?

On the other end of the federal government, a Republican-controlled Congress has typically overseen the best stock market returns. The differences are minor enough that there’s no certainty which party controlling congress (or a split) is best for the stock market.

Congress can be the more impactful part of the federal government in the long run. Executive actions are easily overridden day one by a President from the opposing party taking office. Legislation tends to be more enduring due to the requirement for a larger number of people to be involved. It’s important to note that the effects of legislation may take years to become apparent. This time lag makes it extremely challenging to pinpoint and attribute specific policies to their respective impacts on the ever-evolving dynamics of the market.

What about the White House and Congress combined?

When you widen your lens to encompass both the White House and Congress, the narrative remains consistent. Markets tend to go up irrespective of political control.

Regardless of the federal government’s control scenario, markets go up more often than they go down. 

As the 2024 elections unfold, we urge investors to remember that investing is a marathon, not a sprint. Position your portfolio to be successful in the long run, enabling it to weather unexpected changes from any source. Both parties have experienced periods of positive and negative returns while in power. Despite the inevitable changes in government, companies exhibit resilience and innovation, consistently discovering avenues to yield returns for their investors. In the intricate dance of politics and markets, a steadfast and forward-looking investment approach proves to be the key to enduring success.

Sources:

[1] Equity returns are monthly returns for the Ibbotson SBBI US Large-Cap Stocks Total Return for Jan 1926 thru Oct 1989 (data courtesy of the CFA Institute & Morningstar Direct), and the S&P 500 Total return for Nov 1989 thru Dec 2023 (data courtesy of YCharts)

Data for which party controlled both houses of Congress and the presidency is from the history.house.gov website (https://history.house.gov/Institution/Presidents-Coinciding/Party-Government/)

Changes to Congress and the Presidency are assumed to occur Jan 1st of odd years. A split Congress indicates that each party controls either the House or Senate, but neither party controls both.

Appendix: Bonus Chart 📈

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All too often generations of students stumble through the college planning process. With college costs on the perpetual rise, it is critical to start the planning process early.

Whether you are a beginner to the college planning journey or refining an existing strategy, here’s a visual guide of some critical to-dos for students and impactful strategies for parents depending on your unique situation.

The FAFSA is a financial unlock for college students

The FAFSA is an application for federal student aid such as federal grants, work-study funds, and loans. It’s the largest source of aid to help you pay for college or career school. To qualify, the FAFSA considers the impact of income and assets from January 1 of your sophomore year of high school until December 31 of your junior year of college (assuming a student goes straight from high school to college). For a high school senior filling out the FAFSA in 2023 and graduating in the spring of 2024, you are looking at your prior-prior year’s tax return in 2021.

The FAFSA application window opens as early as October 1st and closes by June 30th of the year you receive aid (depending on the institution’s deadline). However, in 2023, FAFSA will not be available until sometime in December due to the FAFSA Simplification Act, reshaping the entire system. Details about this significant reform can be found in this article.

Follow our yearly timeline to make things a little less stressful

For high school students planning ahead for college, we’ve summarized the major considerations and to-do items. Download the PDF here to print and hang on your fridge.

We can help with education planning

College involves time, money, and emotions. By dedicating effort, you will spare yourself unnecessary stress later. Amidst all the school visits, tests, test planning, be deliberate and have a plan. If you have any questions or would like to speak with one of our advisors, please reach out to me here.

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In recent months, I’ve been pondering the US labor force and how it has changed in the last five years. Amid the ongoing conversations surrounding inflation and the Federal Reserve's (aka The Fed) recent decisions to raise interest rates to manage inflation, I don’t want to neglect the other part of The Fed’s dual mandate: the dynamics of unemployment and the labor force. Prior to COVID-19, unemployment was at 3.5%, the lowest rate in the last 50 years. Today unemployment is around 3.8%, and has been 4% or lower since December 2021, significantly below the median unemployment of approximately 5% the US has experienced over the last 25 years. Since March 2021, job openings have consistently surpassed the number of job seekers.

Unemployment is often considered an indicator of an economy’s health. Like inflation, you want some unemployment, but not too much. Too high unemployment indicates a weak economy. If unemployment is too low, high inflation becomes a concern. Businesses seeking to grow may be constrained because of a lack of workers, limiting overall economic growth.

Strong employment is a major reason why 2023 has not experienced the recession that many feared at the beginning of the year. I wanted to delve into the reasons behind the tight labor market, what can be done about it, and what this signifies for the overall economy.

Labor’s impact on the current economy

The fundamental assumption in most economic models is that production is constrained by two primary inputs: labor (i.e. workers) and capital (i.e. technology). While technology has yielded significant advances in productivity, the necessity for a workforce to drive economic growth remains. A shortage of labor would imply slower economic growth, potentially resulting in reduced stock market growth.

Concerns persist regarding automation displacing jobs. Some have even proposed the implementation of a universal basic income due to the scarcity of employment opportunities resulting from automation (as exemplified by former presidential candidate Andrew Yang, who made this a central theme of his campaign). A variation of this concern has been present for over a century.

The latest development in automation centers around AI potentially increasing productivity to the extent that we might encounter a surplus of labor. Numerous case studies illustrate that technological change does not always materialize as successfully or rapidly as initially projected. A decade ago, there was much buzz about how autonomous cars were poised to revolutionize the world. Substantial progress has been made, but the challenge of perfecting driverless cars has proven more intricate than many had anticipated. (An example is Moral Machine, where you weigh in on how a self-driving car should navigate situations where the car must choose who to protect in an unavoidable collision).

Another illustration can be found in the excessive optimism at the peak of the dot-com bubble. While the internet did transform the way we work and introduced new efficiencies, it took significantly longer than what people in 1999 had envisioned. Forecasting the timeline for technological change impacting worker productivity is challenging.

If I had to guess, I would anticipate that in the near term (i.e. the next 5 years), we will continue to experience a tight labor market that will be a headwind to growth, for the economy and the stock market.

Retiring baby boomers present a significant challenge

By 2030, the youngest Baby Boomers will turn 65. The average American retires at 64. These retiring Baby Boomers possess the most expertise and would ideally be succeeded by Gen X workers with slightly less experience. However, Gen X is too small of a generation to fully replace the baby boomers, and Millennials & Gen Z broadly lack the experience necessary to fully replace the skills of retiring baby boomers.

This is backed by recent projections by the Bureau of Labor Statistics (BLS), showing that total employment is expected to grow by only 0.3% annually for the next decade, with a significant constraint being the slower growth of the working age population. Slowing growth in labor likely means slowing growth in GDP and stock prices.

Furthermore, there has been a consistent decline in the labor force participation rate over time. This is a measure of everyone 16 and older who is not in the military or an institution (due to criminal activity, mental health, or aging). Part of this reflects the aging population. As the proportion of the population beyond retirement age increases, a smaller segment of the population remains in the workforce.

How can we increase labor?

Gen Z is entering the workforce, but as a generation, they are too small to completely replace retiring baby boomers. Producing more working-age adults takes at least 16 years and 9 months, and the US birthrate has been below the stable replacement level of 2.1 for most of the last 50 years. If the US wants to sustain long-term population growth, and consequently, workforce expansion, it must either depend on immigration or find ways to boost the birth rate.

Implementing a policy permitting increased immigration could boost the size of the workforce in America. However, this is a politically contentious issue, and the legal framework around immigration is too uncertain to make reliable long-term predictions. Overly restrictive immigration policy could lead to a labor shortage, and too permissive immigration policy could cause a labor surplus. Foreign workers constitute approximately 20% of the US workforce.

A tighter labor market has some benefits for workers

The scarcity of labor translates into more choices when seeking employment and enhances the bargaining power of job seekers. Companies will have to consider their recruitment and retention policies to ensure they have the workers required for optimal performance. US wages and salaries are remaining above inflation, showing workers ability to demand higher compensation.

A tighter labor market plus higher wages could equal higher inflation rates

However, higher wages also entail increased costs for companies, and the allocation of these costs, whether to customers or shareholders, may result in higher inflation or reduced earnings. To counter inflation, the Federal Reserve has been increasing and maintaining higher interest rates. Many are apprehensive that the tight labor market (associated with demand-pull inflation) and ongoing post-COVID supply chain challenges (linked to cost-push inflation) could make achieving the long-term target of 2% inflation more challenging.

In Q3 2023 we observed inflation rates increasing from just below 3% in June to 3.7% in September. Many consider unemployment and inflation to have an inverse relationship. A tighter labor market may necessitate the Federal Reserve to persist with a more extended and aggressive tightening policy to manage inflation. If the Federal Reserve becomes overly aggressive in its tightening efforts, the concerns that led many to anticipate a 2023 recession could materialize.

All of this hinges on the tight labor market persisting. Technological advancements have the potential to enhance productivity to a level where a smaller workforce can achieve more and sustain economic growth. Modifications in immigration policy could either introduce a new source of workers or further reduce the size of the workforce.

In the long run, successful companies will adapt to the new environment and thrive. A diversified portfolio will continue to capture the growth of the companies that excel. We encourage investors to be prepared for a myriad of reasons to be nervous, and understand given time the market will figure things out and continue to grow.

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There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, there are many notable changes that will allow investors to save more money. One important update for 2024 is that 401(k) elective deferrals increased from $22,500 to $23,000. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2024!

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In today's challenging real estate market, prospective homebuyers face stiff competition and rising costs. However, there are creative ways to navigate these hurdles and secure your dream home, second home, or investment property. Here are nine strategies to consider, that can make a significant difference in your home-buying journey:

1. Seller Concessions

Don't hesitate to ask sellers for concessions to help cover your closing costs and escrow reserves. This can ease your financial burden during the transaction.

2. Borrow From Equity

If you own a home, consider tapping into its equity to fund your down payment and closing costs. Options like refinancing or taking out a home equity loan can provide the necessary funds.

3. Escalation Clauses

Work closely with your realtor to include an escalation clause in your offer. This can help your bid stand out in multiple offer situations by automatically increasing your offer amount to surpass competing offers.

4. Buying Points

Discuss the possibility of buying points with your lender. This upfront investment can reduce your interest rate and lower your monthly principal and interest payments over the life of your mortgage.

5. Rent-Back Options

Negotiate a rent-back option with the seller. This arrangement allows you to stay in your current residence for a period after closing, giving you more time to move.

6. 401k Loans

Consider taking out a loan against your 401k for your down payment and closing costs. Be sure to understand the terms and implications before proceeding.

7. Low-Down Payment Programs

First-time homebuyers should explore no-down payment and low-down payment programs. Many government-backed loans and assistance programs can help reduce your upfront costs.

8. Credit Union Referrals

Reach out to your credit union for real estate broker referrals. Working with an experienced and trustworthy real estate agent can be invaluable in navigating a competitive market.

9. Gift Funds or Equity

Explore the possibility of using gift funds or gift equity from family members to cover your down payment. Ensure you meet the lender's requirements for documenting these funds.

Be creative and resourceful

In conclusion, purchasing a home in a challenging market requires creativity and strategic thinking. By leveraging these approaches, you can enhance your chances of securing your purchase while managing the financial aspects of the transaction. Stay informed, work with experienced professionals, and be bold while exploring these options to make your home-buying journey successful.

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As a Nike Director or VP, there are many incentives for savings and investing through the Nike benefit programs. After making big decisions on your Deferred Comp, 401k deferral, and ESPP contributions, you may be left with decision fatigue when it comes to open enrollment for your health benefits.  

Don’t let decision fatigue hinder you from taking advantage of the most underrated Nike benefit: the Health Savings Account (HSA).  

Here are three reasons why you should consider implementing an HSA strategy for 2024.

1. HSA’s are the only account that is Triple Tax Advantaged

What does this mean?

• Your contributions are tax-deductible.  

• Investment growth is tax-free.

• Distributions are tax-free when used for qualified medical expenses.

That means that you never pay taxes at any point on these dollars. Think about all other Nike benefits and retirement accounts like your 401(k) and Deferred Comp plan, you only get two of these tax advantages and the IRS is getting their money at somewhere along the way.  Using this strategy, you get to eliminate the IRS from the picture.

2. The Tax-Free Growth Opportunity

The goal of this HSA strategy is to save, grow and preserve these triple tax-advantaged dollars to be used for medical expense in retirement.

To do this correctly, you should contribute the maximum amount each year without taking distributions for medical expenses.

Prioritize using cash outside of your HSA account when medical expenses are incurred.

Next, do not leave the entire account balance in cash, but utilize the investment fund options so that you can capture the tax-free growth over the long-term.

Imagine a scenario where you were on the family HSA plan and contributed $7,000 per year for 5 years. You invested these funds and let them grow for 20 years until retirement, earning an average return of 8% per year. In 20 years, your HSA balance would be $140,000 and you only contributed $35,000 to the account in the first 5 years.  With rising health care costs, these funds can be used in retirement to pay for medical expenses, including Medicare premiums at age 65.  

3. You own and control the account

Unlike Flexible Spending Accounts (FSAs) which are “use it or lose it” each year that you make contributions, the HSA is different because it’s an account that you own for your lifetime. You can keep the account if you change plans, retire, or leave Nike.

The contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.  The contribution limits typically receive an inflation increase each year, so make sure you review this and stay up-to-date on the current amount.

Taxes can be one of the largest monthly expenses for many households. As a Nike Director or VP, you could be paying up to 51% in income taxes so it’s important to maximize every opportunity for tax savings.

To get the most benefit from your HSA, you need to be strategic, just as you would be when planning your Deferred Comp, 401k, and ESPP contributions. HSA’s are high deductible plans and if you anticipate substantial medical expenses, the HSA could cost you more than the lower deductible health plan options in 2024. This highlights why it’s important to evaluate the HSA as part of your comprehensive financial plan.

If you have questions about whether switching to the HSA is the right choice for you, please contact our team at nike@humaninvesting.com.

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